ou are auditing a manufacturing company ABC Co. with a profit before tax $2400,000, and the following information comes to light about your client: 1- ABC Co has significant plant and machinery which it uses to make its products. During the year the efficiency of the company’s machinery was improved significantly. This was because a comprehensive review of each piece of machinery was undertaken and an assessment was made as to whether a minor repair, extensive refurbishment or a complete replacement was needed. ABC then took the appropriate action in each case and spent a total of $600,000 in doing so. 2- Following some ratios that obtained from the client, compared with the industry ratios 2018 2019 Industry average Gross profit[% of total sales] Dr AR Cr Sales %42 %65 40% Credit Sales[% of total sales] 40% 75% 35% Receivables Turn over 4.56 2.41 5.1 Inventory % of Total assets 24.7% 28.2% 23.4% Inventory Turn over 2.15 1.75 2.21 Current Ratio 2.31 1.15 2.35 Requirement: A- Considering the audit risk in planning the audit procedures, explain the main issue/s that should be focused on. “what are the main material misstatements risks that you should be prepared for when planning the audit”?? B- For each issue that you identify above, explain evidence that should be obtained.
You are auditing a manufacturing company ABC Co. with a profit before tax $2400,000, and
the following information comes to light about your client:
1- ABC Co has significant plant and machinery which it uses to make its products.
During the year the efficiency of the company’s machinery was improved
significantly. This was because a comprehensive review of each piece of machinery
was undertaken and an assessment was made as to whether a minor repair,
extensive refurbishment or a complete replacement was needed. ABC then took the
appropriate action in each case and spent a total of $600,000 in doing so.
2- Following some ratios that obtained from the client, compared with the industry
ratios
2018 2019 Industry average
Gross profit[% of total
sales]
Dr
Cr Sales
%42 %65 40%
Credit Sales[% of total
sales]
40% 75% 35%
Receivables Turn over 4.56 2.41 5.1
Inventory % of Total
assets
24.7% 28.2% 23.4%
Inventory Turn over 2.15 1.75 2.21
Requirement:
A- Considering the audit risk in planning the
issue/s that should be focused on. “what are the main material misstatements
risks that you should be prepared for when planning the audit”??
B- For each issue that you identify above, explain evidence that should be
obtained.
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